The Ticker

Demystifying Snowflake: The Biggest Software IPO in History

The data warehousing company benefits from a first-mover advantage — but competition is not far behind

Image: Snowflake

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One week ago, Snowflake made history. Debuting on the New York Stock Exchange, the data warehousing company became the largest software company to IPO in the U.S., ever. Initially expected to price shares between $75 and $85, the company went public at $120, catapulting up to $300 in its first day of trading. That broke another record: Snowflake became the largest company to ever double in value on its opening day, reaching a market cap of close to $75 billion.

Reasonably enough, this startling performance has been used as further evidence that the market has lost its mind. A searing hot summer that sent Vroom, Lemonade, BigCommerce, and other IPOs soaring appears to be transforming into an unseasonably balmy autumn.

How else do you explain an unprofitable company with 60% gross margins trading at about 75x the revenue it might earn a year from now?

Despite the rather remarkable multiples, there are reasons for optimism. They’re explored in detail in our longer report on the company, but outlined below are the three reasons Snowflake is here to stay, along with one note of caution.

Before enumerating Snowflake’s merits and weaknesses, it’s worth explaining what the company does.

Historically, a lot of company data has been stored on-premises. That means data is stored on physical servers managed by a company. Incumbents like Oracle and IBM have traditionally dominated the space.

Snowflake is fundamentally different. Rather than help store data on-premises, Snowflake helps companies warehouse it in the cloud. Even more critically, Snowflake makes that data queryable, meaning that it’s easier for businesses to pull insights from the data stored.

This is considered one of Snowflake’s key innovations: separating storage (where the data is held) from computing (the act of querying). By offering this service before Google, Amazon, and Microsoft had equivalent products of their own, Snowflake was able to attract customers, and build market share in the data warehousing space.

It has favorable market dynamics

Snowflake’s total addressable market is massive. The company pegs it at $81 billion, though it may be larger than that. The International Data Corporation calculated that $88 billion in revenue was generated from global data storage in 2018, a figure expected to reach about $176 billion by 2023. The data warehousing market — Snowflake’s space — was considerably smaller but growing well. Estimated at $13 billion in 2018, the market is predicted to reach $30 billion by 2025, a 12% compound annual growth rate. As new devices and software programs increase the amount of data generated, demand for sophisticated warehousing solutions like Snowflake’s is likely to increase.

Critically, Snowflake’s market is fragmented. Datanyze estimates that the largest player in the space, Business Warehouse from SAP, holds just around 15% of the market. They’re followed by Apache Hive (11%) and Snowflake (10%). To continue growing, Snowflake does not need to topple a behemoth that holds majority share, they simply need to hold off rivals and pick off smaller players.

It has a specialist CEO

Unlike many of tech’s success stories, Snowflake is not run by the founders. Started by three database engineers in 2012 in conjunction with Sutter Hill Ventures (SHV), a secretive VC firm, Snowflake is currently helmed by software veteran, Frank Slootman.

Though Snowflake certainly appears to have been well-run prior to Slootman’s 2019 appointment — Mike Speiser, partner at SHV, served as the company’s first CEO before turning the reins over to Microsoft stalwart, Bob Muglia — the outspoken Dutchman is a proven quantity.

Prior to taking over at Snowflake, Slootman ran Data Domain and ServiceNow as an outside CEO. Both tenures can be considered incredibly successful. Data Domain was little more than a startup when Slootman joined, employing just 20 people. He guided the company to $1 billion in sales before brokering a $2.4 billion acquisition to EMC. He oversaw similarly remarkable growth at ServiceNow: From 2011 to 2017, revenue grew from $75 million to $1.5 billion.

If Snowflake is to mature into its valuation, it will need to maintain its breakout trajectory, growing revenue. In Frank Slootman, the company has someone who has done it twice before.

Its growth is stunning

An incredible start to life as a public company should not distract from Snowflake’s remarkable story to date. The company has executed nearly flawlessly since inception, scaling revenue, winning top-tier customers, and expanding with them.

Revenue grew 173% over the last fiscal year, increasing from $96.7 million to $264 million. In the six months ending July 31, 2020, Snowflake logged $241 million, an annual run rate of $482 million. That represented an increase of 132% from the same period the year prior.

Just as impressively, Snowflake has shown the ability to retain its customer base. Net revenue retention over six months in 2020 reached 158%, indicating an increase in customer spend of 58% over the same period the year prior, accounting for churn. This is the second-best net dollar retention among public SaaS companies, exceeding that of Datadog (146%), Slack (138%), and Slootman’s old roost, ServiceNow (~130%). Snowflake’s customer base also spans several sectors and boasts big names, including Office Depot, McKesson, Nielsen, DoorDash, Instacart, and Rent the Runway. Capital One is Snowflake’s biggest customer, accounting for 11% of Snowflake’s revenue in the past fiscal year.

It’s battling giants

Competition provides some reason for circumspection. While Snowflake is operating in a fragmented market, they’re rubbing shoulders with some of the world’s largest companies, including Amazon, Google, and Microsoft. While Snowflake has benefited from a first-mover advantage, the Big Three are catching up, offering equivalent platforms.

What makes matters worse is that Snowflake is reliant on these competitors for data storage. To date, the company has managed to prosper by being a sort of “Switzerland,” playing nicely with the Big Three’s offerings, meaning that customers don’t have to use just one. As more companies operate complex “multicloud” offerings, neutrality can be an advantage. But that may not always be possible. There are no identifiable barriers that prevent the Big Three from muscling in on Snowflake’s market share, and given their technical talent and funding, Snowflake is vulnerable. To that end, investors may want to keep a particularly close eye on Snowflake’s market share.

Snowflake has only just begun its time as a public company — we will get a much better sense of its staying power over the next six to 12 months. Despite strong competitive pressure, an excellent management team, favorable market dynamics, and an exceptional track record suggest that Snowflake may be much more than a flash in the pan. It may be a truly generational business.

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